The effect of small earthquakes on housing prices in the north of the Netherland: a spatio-temporal-similarity approach

The largest natural gas field in Europe is located in the north of the Netherlands. Extraction from it has taken place since 1963, which has induced small earthquakes. Although this was known with fair certainty beforehand, whether households ever anticipated the region to become a riskier place to live at has not been determined.Earthquakes can damage households’ houses structures, increasing maintenance costs. Additionally, they increase risk awareness from living in a prone to earthquakes area. Reducing effects on housing prices attributed to earthquakes can therefore be sourced on the anticipation of higher maintenance costs, or on increasing risk perceptions. The gas-extracting company already compensates for damages done on houses; therefore, foreseen increasing costs should not affect their price. Hence, by studying how earthquakes affect housing prices we focus on households’ willingness to pay to avoid living at a riskier place.We explore this question by means of spatial hedonic models for housing prices in the three most northern provinces of the Netherlands, namely Drenthe, Friesland, and Groningen. Most realtors in the Netherlands set asking prices by fitting a hedonic model with data on previously transacted houses. This is one of the typically argued sources of spatial dependency in the housing market. We therefore employ a spatio-temporal-similarity weights matrix that mimics this asking price setting procedure, and use it to test the fit of several spatial econometric specifications.We make use of detailed data on more than 250.000 transactions between 1993 and 2014. We are able to control for over 40 characteristics of the house and amenities provided at the neighborhood level. Moreover, we control for population increase and the time on the market by means of instrumental variables. To assess the earthquakes’ effect we computed the Peak Ground Velocity (PGV) at each house’s geographical point location for every earthquake that took place in the 5 years prior to the house’s sale.We find no significant effect for PGV in the 5 years prior to the house sale on its price, unless the house was sold during or after the year 2012. In August of said year the largest ever-recorded earthquake hit the region and awareness of them grew noticeably. A house sold during or after 2012 would be transacted for a price almost 4%lower for every percentage point increase in seismic activity. The result is robust to several specifications.